Executive Board Meeting
September 13, 1999

We have met to consider how the IMF can strengthen its contribution via the Initiative for Heavily Indebted Poor Countries (HIPC Initiative) to the all important goal of eradicating poverty. We have also had a very substantial discussion on social policies under IMF-supported programs more generally. I would like to welcome the strong consensus that has emerged on transforming the Enhanced Structural Adjustment Facility (ESAF) in line with the principles set out in my Buff (BUFF/99/107). Let me now summarize our wide-ranging discussion.

Directors considered that the IMF's primary role is to promote macroeconomic stability and structural reforms necessary for achieving sustainable and rapid growth. They underscored the crucial importance of economic growth for poverty alleviation, but also recognized that the IMF must be sensitive to the social implications of its policy advice. In particular, Directors noted that IMF-supported programs have sought to help members address the potential adverse impact on vulnerable groups of their adjustment and reform efforts as well of exogenous shocks, and that such efforts in turn can make a vital contribution toward sustaining economic reforms and protecting living standards. They also observed that sound macroeconomic policies, coupled with effective social and infrastructure spending, foster faster long-term growth. In light of these considerations, Directors observed that social safety nets and appropriately targeted productive public spending, particularly in the social area, can provide critical support for the success of members' adjustment and reform programs.

Broader requirements for improving living standards were also discussed, including promoting faster growth and employment creation and better integrating poorer countries into the international economic system. In addition, Directors suggested that the international community should work to improve these countries' access to industrial country markets, as well as to halt the excessive flow of weapons to developing countries. Directors stressed the importance of good governance, transparency, and accountability for ensuring the effective use of public resources.

Directors discussed the role of the Fund with regard to social policies. Recognizing the need for mutually reinforcing macroeconomic and social policies, they underscored the importance of more closely integrating, with the help of the World Bank, social issues and poverty concerns into Fund-supported programs. Directors agreed that greater attention to social issues was necessary in the context of low-income countries, including HIPCs, where structural reforms are particularly critical. With regard to other countries, a variety of views was expressed on the degree and modalities of Fund involvement in social issues. Some speakers attached importance to these issues in countries other than low-income countries, pointing to the recent experience in the Asian crisis countries and elsewhere. However, a number of Directors, while concurring that IMF-supported programs should encompass members' social policies and poverty reduction efforts, cautioned nevertheless that the IMF should not allow its primary mandate to be diluted. They viewed the World Bank as taking the leading role in developing adequate social safety nets and effective social policies, and the Fund as contributing to poverty reduction mainly through its support of economic policies that provide a conducive environment for sustained growth.

All Directors emphasized that, as regards social issues, the World Bank and other relevant international organizations have the primary mandate and expertise. In this connection, they noted, for example, that the relationship between public social spending, growth, and poverty is complex, and that it is therefore critical to ensure that spending is used productively. Several Directors cautioned that the Fund did not have the panoply of expertise needed to assess the quality of social spending and related issues. Directors, therefore, underscored that the social components of countries' IMF-supported programs should draw, to the fullest extent possible, on the work of the World Bank and other relevant institutions. Some Directors were of the view that when timely inputs from these institutions on essential social components of IMF-supported programs were not available, IMF staff would necessarily have to provide policy advice to the extent feasible. Many other Directors were skeptical about such Fund involvement, particularly if it were to require additional staff expertise. All Directors suggested that, to facilitate such cooperation, these institutions should be encouraged to provide more timely input. Overall, Directors agreed that more intensive cooperation between the IMF and the Bank is essential, proceeding along the lines of these institutions' respective responsibilities and comparative advantages, and thus avoiding duplication of efforts. They welcomed therefore the recent enhanced IMF-Bank cooperation, pointing to the ESAF/IDA pilot program and the preparation of the reports for this discussion.

Turning to specific issues in the area of social policies, Directors noted the scope for further improving the quality and implementation of social safety nets, through comprehensive ex ante analyses and monitoring, relying on the expertise of the World Bank and other organizations. Several Directors recommended that the staff should assess, in the course of surveillance, the adequacy of social policy instruments, the performance of social safety nets, and the potential social ramifications of macroeconomic and financial policies. Many others, however, cautioned that this should not detract from the appropriate focus of Article IV surveillance. We will have to come back to this matter on the occasion of the biennial review of surveillance.

Spending on education and health care has increased in real per capita terms and in relation to GDP in most countries with IMF-supported programs during the past decade. While this has been accompanied by an improvement in a broad range of social indicators, Directors noted the diversity in outcomes caused by the differences in the effectiveness of social spending. Although some cautioned that too much emphasis on the absolute amount of social spending could send the wrong message, Directors more generally stressed the importance of efficient and well-targeted spending for ensuring that gains in social indicators are commensurate with spending increases. Further improvements in these areas could be achieved, inter alia, by strengthening a country's budget formulation and implementation capacity.

The establishment of national quantitative targets for poverty reduction--consistent with the International Development Goals for 2015 to which countries have subscribed--could also prove beneficial, especially if the higher targeted spending is used productively. Directors suggested that, in setting targets, spending needs in priority areas for poverty reduction other than health, education, and social safety nets--such as basic sanitation, rural roads, and access to clean water--should also be taken into account; such priority spending may contribute as much or more to poverty reduction. Some Directors thought that core labor standards had a valuable contribution to make to the achievement of these targets, while other Directors were concerned that this issue is outside the IMF's main areas of responsibility. We will come back to this issue after further consultations with the World Bank and the ILO.

Directors considered that in countries where social spending is so low as to be a critical area of weakness, structural benchmarks could continue to be used selectively to protect social spending and to promote key institutional reforms. While many Directors thought that such benchmarks should only be used in ESAF-supported programs, some other Directors saw the value in applying performance indicators (performance criteria and structural benchmarks) to a broader range of Fund-supported programs. In establishing such structural benchmarks, IMF staff will rely on inputs from the World Bank and others to ensure, inter alia, the targeting and quality of spending.

Directors noted with concern the widespread poor quality of data on social spending, social indicators, and social protection arrangements, which inhibited the design and implementation of effective social programs. They saw an urgent need for country authorities to identify weaknesses in data and data collection, and to make data improvements in collaboration with the World Bank, other international agencies, and civil society.

Directors welcomed the broad and open consultative process undertaken in this second stage of the review of the HIPC Initiative and they appreciated the wide range of comments and proposals received from IMF members as well as NGOs and other elements of civil society, which have provided valuable inputs into our discussion of strengthening the link between debt relief and poverty reduction.

Directors stressed that, as implied by the time horizon of the International Development Goals for 2015, significant poverty reduction and eradication can be accomplished only through sustained efforts over a number of years, if not decades. Directors endorsed the joint staff paper's central premise that a robust link between debt relief and poverty reduction could best be established by ensuring the integration of debt relief into a comprehensive outcome-oriented strategy for poverty reduction and eradication, which would help assure the effective use of all available resources toward that goal.

Directors supported the ambitious proposals in the joint paper. They stressed that durable poverty reduction requires rapid and sustained economic growth that can be fostered by sound macroeconomic policies and structural reforms. At the same time, Directors recognized that growth is, by itself, not necessarily sufficient to reduce poverty. Poverty is multi-dimensional and thus the policy response would also need to be multi-dimensional, embracing specific structural reforms that improve the participation of the poor in both the process and benefits of economic growth. HIPC Initiative assistance could permit increased spending to improve access of the poor to basic services such as education, health, and clean water as well as the promotion of rural development and basic infrastructure. As noted already, efforts are also required to improve the quality and targeting of such spending.

Directors emphasized that broad-based participation, good governance, transparency, and accountability are essential to the successful and sustained implementation of a poverty reduction strategy. Increasingly, a government's commitment to these principles is seen as the litmus test for its efforts to improve social conditions. Directors also supported the use in HIPCs of a clear set of outcome-oriented goals for social indicators and quantified intermediate indicators to ensure that poverty reduction strategies are well designed and their implementation effectively monitored.

Some Directors noted that poverty funds have been widely advocated for channeling the savings from debt relief to priority social spending. Directors stressed the need to ensure that all resources, including those of a poverty fund, are integrated in a transparent, well-managed, and accountable budgetary process, to help avoid wasteful duplication and ensure additionality in spending.

Most Directors supported the staff proposal that the broad framework for outcome-oriented poverty reduction and eradication in Fund-supported programs for low-income countries should be implemented through the development of a nationally-led joint Poverty Reduction Strategy Paper (PRSP). The PRSP should ensure consistency between a country's macroeconomic, structural, and social policies and the goals of poverty reduction and social development. Directors agreed that the PRSP should be prepared by the authorities, in close collaboration with the World Bank and the IMF, and that it would specify the choice of goals, the formulation of policies, and the monitoring of implementation. A key element of the PRSP would be a full costing of the social expenditures needed to meet the social objectives within a sustainable medium-term macroeconomic and budgetary framework. Some speakers recommended that the PRSP build on poverty programs already under way in countries and draw on the general work on poverty being done at the World Bank. Directors also stressed the important principles of ownership, transparency, and broad-based participation. Publication of PRSPs would be in line with these principles, and would facilitate future monitoring and accountability.

Directors supported the proposals that the PRSP be discussed by the Executive Boards of the World Bank and the IMF, both of which would take formal decisions endorsing the PRSP, and that it become--once it is effectively established--the vehicle for closer Bank-IMF collaboration in IDA and ESAF countries, providing the framework for Bank and IMF lending operations. Several Directors also urged that donor assistance be guided by the PRSP. Directors agreed that the staffs should proceed with introducing PRSPs in HIPCs and in the pilot cases for enhanced Bank-IMF collaboration, but they recognized that this change would take time and would need to be phased in pragmatically, taking into account the circumstances and capacities of each country. The PRSP would progressively replace the Policy Framework Paper (PFP).

Directors agreed that it is desirable that a PRSP should be in place when a country reaches its decision point under the HIPC Initiative. However, to avoid delays in the provision of HIPC Initiative assistance, they agreed that, during a transition period covering early cases, the decision point could take place while a PRSP is being formulated, but demonstrable progress in implementation of the PRSP would be expected prior to the completion point.

Directors agreed that for HIPCs that have already reached their decision or completion points under the current framework, the timing of the proposed additional debt relief should be determined, inter alia, on the basis of an assessment of their progress in designing and implementing their poverty reduction strategies. A number of Directors, however, underscored that this should not lead to unnecessary delays in the provision of enhanced debt relief. Directors stressed the need to ensure that all countries are treated equitably.

Directors agreed that effective debt management by the debtor countries is important to ensuring a robust exit from unsustainable debt burdens. They encouraged the staff to explore with World Bank staff and other agencies ways to provide further support for the development of transparent and accountable debt management systems.

Directors agreed that the proposed new and ambitious approach for helping ESAF countries should give greater prominence to the interlinkages between growth and poverty reduction and eradication. In this spirit, Directors took note of the suggestion that a suitable new name for our transformed facility should be agreed that captures its key objectives--adjustment, growth, and poverty reduction/eradication.

The PRSP would provide the policy framework for this new approach and would be guided by the following considerations:

• The costs of social and sectoral programs aimed at poverty reduction would be taken into account more fully in the design of economic policies that seek to foster faster sustainable real growth.

• Due emphasis would be accorded to good governance, in particular in government budgets, together with full transparency, effective monitoring procedures, accountability, and civil society involvement.

• Key reform measures that are critical to achieving governments' social goals in programs supported by this facility would be highlighted.

Directors emphasized, however, that future country programs supported by this facility should retain the key features of current ESAF arrangements, avoiding a proliferation of conditionality. They requested the staff to prepare more detailed proposals on the appropriate modalities for their consideration following the Annual Meetings.

Finally, Directors supported making the two papers, my statement, and these concluding remarks available to the public.